Homeowners Need to insure Their Houses to Full Replacement Value: Too Many Don't and Won't Have Enough Insurance Money to Rebuild if Disaster Strikes

One of the biggest frustrations that I had when working at an insurance agency was arguing with policyholders over how much their homes were worth versus how much it would cost to rebuild their homes if they were totally destroyed. The two numbers are definitely not the same.

And that may come as a surprise to some.

The cost of building materials increases many times faster than a property's retail value does. As we've seen from the collapsed housing market, a house may not sell for what it's worth at all. But the cost of the materials used to build the house and the labor involved doesn't drop in price. Building material costs have increased anywhere from 3-6% a year.

Labor costs have also increased exponentially as well. That is figured into replacement cost.

Unfortunately, insuring the house to it's full replacement value usually costs more in premiums, which most people don't like. That's understandable. But if the house is protected to replacement value, that's a well-protected asset.

Let's play with some numbers:

You own a house that is appraised at $50,000. Your insurance company informs you that it would cost you $175,000 to put it back up if it were left in ruins by fire or by a tornado.

You tell the insurance company that they're full of it and tell them you want your home insured to $50,000. Bad move. The insurance agent either does what you want them to over their explicit objections (real bad move) or tells you to go find another insurance agency. For this instance, we'll assume that the agent does what you want and writes the policy for $50,000.

Some months later, a tornado blows through and severely damages your house. One inner wall is left standing; everything else is rubble.

You start to rebuild and the insurance company sends a check for $50,000. The builder tells you that another $150,000 is needed to complete the construction. Uh oh.

You storm over to your insurance company and ask--"Where's the rest of my ^#$^# money??!" and the agent tells you "You insured your house to $50,000. I warned you. Sorry." That's when the screaming really starts.

Replacement coverage would cover the entire amount with minimal difficulty.

This scenario is playing out in my area right now. A tornado blew through our area on August 24th and took out two dozen homes. Some of the victims have been on the news, saying that they didn't have home owners insurance, or didn't have enough coverage to rebuild. That's really sad.

Others have already had their homes demolished and are preparing to rebuild on the same spot, though the neighborhood is still in ruins.

It may cost more in the short run, but people should protect their homes with replacement value on their insurance policies.